More upside than downside for housing in 2013: Goldman Sachs

Investors will get a fresh update on the state of the U.S. housing market later on Wednesday, with an index of sentiment among home builders set to show a tickup, though not over that key reading of 50 that shows more builders are seeing selling conditions as better, not worse. Read: What to watch on U.S. economy on Wednesday

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House in Kahala, Oahu, Honolulu, Hawaii

Ahead of that, Goldman Sachs offered up its latest thoughts on that key sector in a research note. Their view: Housing is likely to ’outperform’ otherwise sluggish macroeconomic financials that they expect in 2013. Goldman admits that it’s harder to identify downside risks to a highly cyclical sector such as housing, but easier to pick out upside risks, which they do.

They revisited ‘housing stabilization’, which was among their top market themes for 2013, coming up with four reasons why outperformance in this sector is coming.

Mortgage lending terms are more likely to ease up than tighten. Sure, fiscal restraint is going to weigh on housing demand as income growth weakens, but Goldman expects easing of lending standards — as tight as they’ve ever been, it says — will offset that.

Pent-up demand is coming back. Recent declines in formations of households among the young and immigrants is likely to prove transitory and further boost housing demand, said Goldman. Of course, they said some of this improvement will depend on the strength of economic growth, which could benefit the rental as well as owner market. Even so, some of that ‘pent-up’ demand wants to own homes.

Private investor demand set to gain momentum. While it’s tough to find the data, an increasing number of investors have been getting capital together to buy foreclosed or distressed properties, invest in renovating them and renting out. Goldman sees that activity gaining momentum in 2013, which could sustain housing demand at levels higher than might otherwise expected and help establish a rough ‘floor’ on housing prices.

Housing demand should be able to ‘look through’ a temporary soft patch. Expected future incomes factor big into household decisions, more so than for non-housing consumption. If that forward outlook improves, that should help housing demand ‘outperform’ the strength of current income growth. Also, expectations that prices will go up should also help further strengthen demand for the housing market.

Of course, says Goldman, housing will take a “hard hit” if debt-ceiling negotiations go awry and the economy drops into a deep recession. “But we still think this scenario is unlikely,” said Goldman. “A fiscal ‘hump’ in the first half of 2013 remains our central scenario, and we think the housing recovery should not only persist through this weakness, but could well surprise to the upside.”

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